Obama's economic policies mimic Bush's

Wednesday

Aug 14, 2013 at 6:00 AM

By Peter S. Cohan, WALL & MAIN

As President Obama enjoys his stay at the Martha's Vineyard home of his friend, private equity major domo, David Schulte (who is managing general partner of Chilmark Partners), I feel as though I am living through George W. Bush's fourth term in office. To be fair, I believe that the current hand on America's tiller is a much more rational person than our 43rd president — it's just that the economic values of the two presidents are difficult to distinguish when measured by two key measures of income inequality — corporate profits and wages.

In 2008, as Mr. Bush's term in office was wrapping up, I observed that income inequality was at a higher level than it had been since 1928, which was the year before the Great Depression. In 2012, the U.S. economy had taken that inequality to an even wider gap.

And despite speeches to the contrary, Mr. Obama's appreciation for the finer things in life — such as the 5,000 square foot, 9.5 acre Chilmark estate he is enjoying this week, that only the most elite of incomes can buy — suggests that he is in no big hurry to use his power to even the economic score.

One popular way to generate the incomes needed to afford this Chilmark property — valued at $7.6 million — is to borrow money to acquire companies, cut costs, and sell them at a profit. Thanks to Chilmark's investments like Sealy Corp., Carter Hawley Hale Stores, Schwinn Bicycle Co., and radio station operator Jacor Communications Inc., Mr. Schulte can afford to own the kind of property that epitomizes American inequality. (Mr. Bush had his own private equity contributors — such as Blackstone Group's Stephen Schwarzman, whose 60th birthday featured crab claws and other expensive delights).

How much inequality? On August 9, the New York Times reported that for the most recent year that statistics are available — 2012 — corporate profits and low wages and salaries hit records not seen since before the Great Depression. More specifically, in 2012, corporate profits after taxes amounted to a record 9.7 percent of GDP while wages and salary income reached 42.6 percent of GDP — tied with 2010 for the lowest figure ever recorded — going back to 1929.

Is it mere coincidence that record high corporate profits and record low wages are happening at the same time? I would guess that the low pay contributes to the record profits. After all, American GDP has been growing at a mere 2 percent, and therefore the only way for companies to grow revenues faster than that is to export their products to faster-growing emerging markets — which they have been doing — and to get more work per dollar of salary out of each worker. And thanks to the 7.5 percent unemployment rate, it is not difficult to force workers to accept no wage increases and make them work harder. Thus corporate executives get richer and the average worker falls further behind.

This income inequality is nothing new. Under Mr. Bush, income inequality hit a record. In 2007, Emmanuel Saez, an economics professor at University of California-Berkeley, found that the top .001 percent of American earners took home 6 percent of total U.S. wages — about twice the figure for 2000. Mr. Saez also found that the top 10 percent of American earners pulled in 49.7 percent of total wages: a level "higher than any other year since 1917 and even surpasses 1928."

Mr. Bush's policies contributed to this. He cut $1.3 trillion worth of taxes, 32.6 percent of which went to the top 1 percent of earners. And thanks to $7.8 million in contributions from Ameriquest, a subprime-mortgage company, Mr. Bush pushed his Ownership Society initiative to get poor people into mortgages they could not afford so that Wall Street could engorge itself on borrowing to buy toxic waste. And that over-borrowing caused the subprime mortgage bubble to build and ultimately collapse — producing the Great Recession of 2008 that the U.S. government bailed out with $23.7 trillion worth of cash and guarantees to the largest financial institutions.

Mr. Obama shaved off some of the roughest edges of Mr. Bush's economic policies.

For instance, in January, he signed a deal that raised the tax rate on individuals with income over $400,000 and families earning more than $450,000 to 39.6 percent — a move that affected fewer people than the top 2 percent of earners whose taxes Mr. Obama had vowed to increase. And the deal also raised taxes on those earning lower incomes — due to a payroll tax increase that took $50 more a month from the paychecks of Americans earning $30,000 a year and $189.50 more a month for those earning $113,700.

The only way for the average person to make some progress is to invest in the stock market. Of course, that only works if you have money to invest. But if you do, you can buy a low expense S&P 500 index fund that tracks what has been the record-breaking performance of the stock market during Mr. Obama's tenure in office — 22 percent a year.

Under Mr. Bush, stocks fell at a 5.7 percent annual rate — this is the most significant difference in economic policy between the two presidents.

Peter Cohan of Marlboro heads a management consulting and venture capital firm, and teaches business strategy and entrepreneurship at Babson College. His email address is peter@petercohan.com.